10 stocks least addicted to the Fed’s QE3

These companies don’t need a Bernanke-induced fix

SAN FRANCISCO (MarketWatch) — U.S. markets are partying like it’s 2007 following the Federal Reserve’s announcement it will launch a new round of quantitative easing, better known as QE3 — but the stimulus might not keep the celebration going for long.

Fed Chairman Ben Bernanke on Thursday said the U.S. central bank would start buying about $40 billion in mortgage-backed securities every month to tame high unemployment as well as keep the federal funds rate near zero until mid-2015.

Stock investors responded enthusiastically, pushing both the Dow Jones Industrial Average
DJIA, +0.72%
and the Standard & Poor’s 500 Index
SPX, +0.59%
to highs not seen since late 2007. Read more on QE3.

While the rallying cry of optimists has been “Don’t fight the Fed” because the easing supports stocks, skeptics liken the measures to plying an addict with more drugs in that the market needs an increasingly bigger hit of QE for ever-dwindling returns.

With that in mind, MarketWatch polled several mutual-fund and money managers and asked which stocks are likely to be the most resilient once the euphoria of QE3 fades.

1. Apple Inc.

The tech sector is among the least addicted to QE and there are several reasons to prefer these stocks now, according to Paul Nolte, managing director at Dearborn Partners.

“They’ve fared reasonably well in this type of environment, they tend to run on their own cycle, the valuations remain reasonable and now they have the added bonus of a dividend,” Nolte said.

Apple Inc.
AAPL, +1.63%
stands out as a prime example of a company that has marched to its own beat, breaking though price targets as it continues to churn out must-have devices with not even the weak economic climate denting demand.

Also, momentum for Apple shows no sign of slowing, given the response to the unveiling of the company’s iPhone 5 on Wednesday and plans for an aggressive rollout of the device. Read more on Apple's iPhone rollout.

2. Facebook Inc.

One of the stocks that investors love to hate may also be one least tied to QE efforts.

Following Facebook Inc.’s
FB, +0.65%
spectacular fall from its $38 initial public offering price, Alan Lancz, president of Alan B. Lancz & Associates, said he likes the stock, and has even been selling shares of Apple and Google Inc.
GOOG, +1.66%
to invest in Facebook.

There are indications that the battered stock may be skipping along its bottom after hitting a recent low of $17.55 earlier in September.

On Wednesday, the stock posted its largest one-day percentage gain since going public, 7.7%, and it’s safe to say it had nothing to do with QE3 anticipation. The rally followed remarks from Facebook CEO Mark Zuckerberg, who expressed optimism about the social-network website’s ability to generate advertising revenue on mobile devices. Read more about Facebook shares.

3. Newmont Mining Corp.

Gold mining stocks are depressed in comparison to gold bullion and gold ETFs, and that’s one reason they’re attractive, according to Lancz.

“As far as the QE3 aspect, it’s still cheap,” Lancz said, noting that unlike bullion or ETFs such as SPDR Gold Trust
GLD, -1.05%
investors can pocket the income stream from the dividend in addition to finding capital appreciation potential from the stock.

4. CF Industries Holdings Inc.

Companies that are less likely to depend on QE for strength are those with growth and momentum to withstand setbacks, said Jeff Hirsch, editor-in-chief of the Stock Trader’s Almanac and chief market strategist at Magnet AE Fund.

Fed pushes out rate-hike expectations

(6:52)

Former White House Chairman of the Council of Economic Advisers Austan Goolsbee and Simon Constable discuss the Fed's decision to initiate the purchase of mortgage securities and to hold interest rates steady. Photo: Associated Press.

In the latest quarter, CF Industries posted a 24% rise in profit as it trimmed its cost of sales. The firm also saw free cash flow increase by 76% to $352 million for the quarter, according to FactSet.

The company also issued a favorable outlook for the remainder of the year and into 2013 because of high corn-planting expectations, strong global fertilizer demand and a tight domestic nitrogen supply.

Shares of CF Industries are currently trading near their 52-week high of $221.76, having gained more than 50% for the year so far.

5. Procter & Gamble Co.

Not only are consumer staples stocks a solid bet in the face of QE uncertainty, but they’re cheap nowadays, according to Jason Subotky, co-manager of Yacktman Fund
YACKX, +0.34%

“Consumer staples have been behind on the rally, so they’re very attractively valued, and the businesses are very resilient to the economy,” Subotky said.

Year-to-date, consumer staples stocks are up about 10%, compared with a 16% gain on the S&P 500 Index.

By comparison, Procter & Gamble Co.
PG, +1.04%
is only up about 3% for the year with all of that occurring in the past month. Yet the stock’s momentum has been building as it has rallied off its 52-week low of $59.07 in late June, gaining 16% in less than three months.

Moreover, the stock’s 50-day moving average just crossed above its 200-day moving average last week after the company announced plans for new premium, higher-margin versions of its products in developed markets.

6. 3M Co.

The best way to neutralize the QE effect is to be defensively positioned, said Dave Steinberg, managing partner of DLS Capital in Chicago. For him, that means consumer staples stocks.

3M Co.
MMM, +1.48%
is one of his favorites. The company is well-diversified and earnings growth has been on a consistently upward trajectory, Steinberg said. The stock is up about 13% over the past year and currently sports a 2.6% dividend yield.

7. American Water Works Co.

Whatever the outcome of QE or the economy or the presidential election, people are always going to need fresh water. The U.S. has under-invested in modernizing its water infrastructure, according to Matt Berler, co-manager of Osterweis Fund
OSTFX, +0.49%
.

That’s one reason why American Water Works Co.
AWK, -0.04%
is so attractive, Berler said.

Voorhees, N.J.-based American Water, the largest publicly traded water and wastewater utility in the U.S., provides services to more than 30 states. The company posted a 32% rise in profit in the latest quarter on a 12% rise in revenue.

“There’s a backlog of construction needs, about $200 billion nationwide, so they’re viewed as a job creator,” Berler said.

The company has also been able to grow its dividend by 7% to 9% a year and most recently hiked its quarterly dividend to 25 cents a share from 23 cents a share. The shares currently have a 2.7% dividend yield.

8. Johnson & Johnson Inc.

Hitting on both the health-care products and consumer staples themes, Johnson & Johnson Inc.
JNJ, +1.14%
was a pick of two of the managers polled, Subotky and Oliver Pursche, president of Gary Goldberg Financial Services and co-manager of GMG Defensive Beta Fund
MPDAX, +0.49%
.

That sort of double cover may be needed if QE3 ends up hurting U.S. stocks in the long run, as Pursche predicts. Also, J&J pays a dividend yielding 3.5%.

“I don’t want to draw a hyper-bear scenario, but every time the Fed has engaged in easing, the net impact is on risky assets,” Pursche said. “Given we’ve rallied since June 4 because of QE, things are priced to perfection.”

After the November election, Pursche said, downward pressure on the market will only grow as Congress is pressed to repair U.S. fiscal policy.

Blue-chip J&J is only up about 5% for the year, and the stock has traded in a relatively narrow range over the past 52 weeks — between $60.83 and $69.75. Back in June, shares jumped 7% over the course of a week after the company received approval to buy medical device maker Synthes for $20 billion, resulting in upgrades from several Wall Street analysts.

Since then, shares have held close to their 52-week high of $69.75.

9. Kinder Morgan Inc.

Energy infrastructure is an area that may not have an attractive return on investment, but these companies do pay dividends and adhere more to fundamentals than to news from the Fed, according to Berler, the Osterweis manager.

Berler sees Kinder Morgan Inc.
KMI, -0.52%
as more of a secular growth-stock story rather than a commodities play, even though it is the largest energy pipeline and infrastructure company in North America and stands to gain from shale-oil transportation.

Kinder Morgan, which has a 3.9% dividend yield, recently had to unload about $3.3 billion worth of assets in the Rocky Mountains as part of an agreement to close it’s $38 billion acquisition of El Paso Corp. Read more on Kinder Morgan asset selloff.

“We’re focused on companies that can grow even if unemployment stays high,” Berler said.

On Wednesday, Bank of America Merrill Lynch upgraded Kinder Morgan to neutral, citing the company’s more balanced risk-reward profile. The divestiture improved the stock’s valuation and dividend growth prospects, and reduced the company’s direct exposure to commodities pricing, B. of A. analyst Gabe Moreen said in a research note.

10.Total S.A.

European stocks are unpopular because of the region’s fiscal difficulties, and accordingly are more undervalued, said Pursche of Gary Goldberg.

In that respect, he favors Total S.A.
TOT, +0.33%
, the French energy giant, over Exxon Mobil Corp.,
XOM, +0.77%
for example, because U.S. stocks already have QE3 priced into them, Pursche said.

“Compare Exxon Mobil to Total and you see similarities where they get their revenue, but after that, they’re different,” Pursche said.

U.S. shares of Total have been on a tear recently up 9% in the past month, compared with a 3.5% rise from Exxon Mobil. Total also carries a 4.6% dividend yield, versus Exxon Mobil’s 2.5% yield.

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